Personal Finance

What impacts my credit score? (And how to improve it)

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Your credit score has a major influence on your life. That one little number can help you secure more credit, which can lead to obtaining a credit card with more favorable terms, a car loan or a better mortgage rate (or any mortgage at all).

Before anyone lends you money for something, they look to your credit score to determine how big a risk you are, and how likely they think you are to pay them back. The more risk they're taking, the more they're going to want you to pay.

But even when you're not borrowing money for something, a bad credit score can still bring you down. For example, in my states, insurance companies charge you more for policies if you have a low credit score. Credit scores can also affect your ability to rent an apartment or get a new cell phone. 

The gold standard of credit scores is the FICO Score. Created by the Fair Isaac Corporation, the majority of lenders look at your FICO Score when considering your credit. The higher your score, the better.

Without further ado, here are the five most impactful factors that make up your credit score.

Payment history

The most important responsibility in lenders’ eyes is that you pay your credit card bill on time. This makes up 35% of your credit score. Ideally, you’ll pay your credit card bill in full every month. However, as long as you make your minimum payments each month, you’ll keep your credit score in solid standing. Even one missed payment can have a significant negative impact on your score.

Accounts owed

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The second most important factor, credit usage, makes up 30% of your credit score. You can determine this portion through your credit utilization rate. Calculating your rate is simple — take your total debt (what you currently owe) and divide by your total credit limit. This calculation only takes into account “revolving credit,” which largely consists of your credit card or other lines of credit. A monthly loan like a mortgage or car doesn’t factor into your credit utilization rate.

Let’s say you have two credit cards. If you owe $1,000 on one and $500 on another, with a total limit of $10,000 on the two cards, your credit utilization rate is 15% (1,500/10,000).

Generally, the lower your rate, the better. A lower score demonstrates to lenders that you’re in control of your spending and won’t risk having mountains of debt pile up.

Length of credit history

The length of your credit history accounts for 15% of your credit score. Your credit history length is broken down into three parts: the age of your newest credit account, the age of your oldest credit account and the average of all your credit accounts. If you’ve just opened up your first line of credit, all of those numbers will be the same. Lenders like to see a longer credit history, especially if you’ve paid that credit on time and have a modest utilization rate.  

New credit

Accounting for 10% of your credit score, new credit considers how frequently you’re opening up new lines of credit. Typically, it’s considered riskier if you open multiple credit accounts in a short period of time.

For example, if you’ve had a credit card for five years that you’ve paid off consistently and decide to apply for a second one, most lenders wouldn’t consider that very risky. However, if you’ve applied for five credit cards within one year, especially if you don’t have a long credit history, lenders won’t view that positively.

Credit mix

The final 10% of your credit score looks at your credit mix. Remember the “revolving credit” accounts from above? This portion of your score considers that, too. Any payments that have variance, whether in monthly or minimum payments or due date, are considered a revolving account. So, your credit cards, retail cards, gas station cards or home equity lines of credit (HELOC) fall under this category.

But credit mix also looks at “installment accounts,” which are fixed payments that need to be fulfilled until they’re paid in full. Things like a mortgage, car loan or lease or student loan payments fall under this type of account.

If you don’t have each of these kinds of credit, that’s okay. Since credit mix makes up such a small portion of your overall credit score, opening up, say, a car loan just for the sake of it generally isn’t worthwhile.

Credit score ranges

Your credit score can range from 300 to 850. The higher the number, the better. Here’s how lenders generally break down credit score ranges:

Credit Score

 

Less than 580 — Poor: If your credit score is under 580, lenders believe you’re a very risky borrower. This score is below the national average for U.S. consumers; while it may not preclude you from every activity, you’ll find it’s more difficult to work with a lender if need be.

580-669 — Fair: Your credit score is still slightly below the national average, though many lenders will approve loans with scores in this range.

670-739 — Good: Your credit score is right around the national average, or maybe even slightly above. You can apply and be accepted for most loans.

740-799 — Very Good: Your credit score is above the national average and shows lenders you’re a dependable borrower.

More than 800 — Exceptional: Your score is well beyond the national average and shows you’re a very dependable borrower. You’ll likely be approved for any type of borrowing with any lender.

 

 

How your credit score affects your car insurance

As alluded to in the introduction, your credit score doesn't just affect you when you want to make a purchase on credit. In fact, a bad credit score can raise your insurance rates by 115%, on average. And in some states, you may be paying upwards of 166% more than someone with exceptional credit. 

There’s some correlation between having poor credit and being more likely to file a claim, which is why costs can vary so much. It’s also worth noting the balance of each credit score factor shifts a bit when an insurer is looking at your score.

The credit mix drops down to only 5%, while payment history increases to 40%. It’s a small shift, but it can be a sizable one if you struggle to make payments on time.

Average Car Insurance Rates by Credit Score.png

But there’s good news. Moving up just one credit tier can save you an average of 17%, or nearly $400 annually, on your car insurance premiums. 

Additionally, there are other ways you can reduce your insurance costs. Remember to shop around regularly, and look at other discounts your insurance company offers. You may be able to find additional areas where you can save.

Compare insurance rates quickly and easily.

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How to improve your credit score

If your credit score isn’t quite where you’d like it to be, you can take steps to improve it. Here are some of the best places to start:

Get a copy of your credit report. This can help you further understand your credit history and see areas for improvement. You can get a free report from one of the three major credit bureaus: Equifax, Experian or TransUnion. Some credit cards also offer free score and report updates, too.

Make outstanding payments. If you have any payments that are past due, pay them as soon as possible. Lenders and insurance agents can see how late a payment was (in 30, 60, or 90+ day installments). The later the payment, the more harmful to your score. 

Pay off debt. Removing debt is a great way to boost your credit score. Even if it’s just a few extra dollars each month, paying off your debt more quickly goes a long way.

Keep paying bills on time. Missing a payment can lower your credit score in a hurry. Continue making your payments on time and, ideally, in full, and you’ll continue seeing growth in your score.

Don’t open up new lines of credit. Every time you open up a new line of credit, you get a hard inquiry onto your report. Those stay for two years, so opening up several in a short timeframe will drop your score.

 

Interested in learning more about credit scores and the impact it can have on your insurance? Check out the resources below.

Car Insurance for Drivers with Good Credit

Car Insurance for Drivers with Bad Credit

Car Insurance with No Credit History

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Joey Held

As a writer, Joey Held has specialized in business, marketing, sports, music and insurance topics for more than a decade. He's also a podcaster and author of Kind, But Kind of Weird: Short Stories on Life's Relationships. His first car was a Buick Regal with an inconsistent radio but pretty good gas mileage.